Page last updated at 17:23 GMT, Tuesday, 29 January 2008

Economy puts Republicans at risk

By Steve Schifferes
Economics reporter, BBC News

US President Herbert Hoover
The Great Depression cost Republican President Herbert Hoover his job

In his State of the Union address, President George W Bush made reviving the US economy the centrepiece of his last year in office. But can he do enough to avoid blame for the slowdown?

When the economy is in trouble, it rarely bodes well for the party in power.

Republican President Herbert Hoover was blamed for the 1929 Great Depression, leading to a landslide victory for Franklin D Roosevelt and ushering in an era of Democratic reform that lasted for a generation.

The most popular Republican president of recent times, Ronald Reagan, was elected in 1980 over his Democratic incumbent, Jimmy Carter, after inflation soared to a record high during the oil crisis.

Economic woes also played an important role in Bill Clinton's win in 1992 over Mr Bush's father, George H Bush, who lost after one term in office.

"It's the economy, stupid"

As the economy has become the most important election issue, the Republicans are increasingly getting the blame this time as well.

Recent polls show that Democrats have a wide lead over Republicans on which party would do better on the economy, dealing with the recession, helping home owners - and even lowering taxes.

Economy: Dem 43%, Rep 25%
Recession: Dem 41%, Rep 20%
Home ownership: Dem 39%, Rep 19%
Taxes: Dem 36%, Rep 31%
other %= don't know, neither
Source: Wall Street Journal/NBC poll, 20-22 January, sample 1,008

Mr Bush's temporary stimulus package was designed to restore his government's credibility on economic issues, after months during which he refused to acknowledge the possibility of a major slowdown.

And he can point to a number of achievements during his two terms in office: 52 months of steady growth since the mild recession in the first year Mr Bush took office, eight million jobs created, and both the budget deficit and trade deficit, although high, coming down.

A glut of unsold homes is depressing US house prices
A glut of mortgage repossessions is depressing the US economy

But his problem is that 2008 looks like being a much more difficult year.

House prices are continuing to fall, spooking the housing market, and recent stock market falls show that investors agree with the public that a recession is imminent.

US inflation
Credit markets are still tight as banks seek to rebuild after their massive losses.

The IMF says that the US economy will grow by just 0.8% this year - a sharp slowdown.

And rising energy costs have put pressure on family budgets, while a sharp slowdown will also make the Federal budget deficit bigger.

So Mr Bush has limited room for manoeuvre, both economically and politically.

Stimulus plan

It has only been in the last few weeks that Mr Bush has begun speaking of broader economic difficulties that go beyond the woes of the housing market.

And it is only then that he reached out to get bipartisan support in Congress for a $150bn economic stimulus plan designed to help get the US economy back on its feet.


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He argues that "if enacted in a timely manner", it will create 500,000 jobs and boost the economy by 0.66%.

But there are a number of problems under the surface that could still derail the agreement.

First, there is a real argument about whether targeting the money to poorer people would give a greater economic stimulus, as they are more likely to spend all the rebates immediately.

This is why Democratic Senators, such as Max Baucus, chair of the Senate Finance Committee, would like to include increased unemployment benefits in the package.

Secondly, there is a question of how quickly the IRS could actually distribute the money to taxpayers.

Based on previous experience, cheques are unlikely to be sent out until the summer, when the recession may already be over.

And finally, the spending threatens to send the budget deficit into a spiral at a time when tax receipts are falling, renewing the sharp debate between Republicans and Democrats about tax cuts as opposed to cuts in spending.

Deeper problems

Even if these issues are overcome, the slowdown in the US economy is unlikely to be reversed by a stimulus package of less than 1% of GDP.

The sharp Fed rate cuts have also been less effective than usual in stimulating the economy, because of the deeper problems in the credit markets.

Ben Bernanke
Fed boss Ben Bernanke has moved aggressively to cut rates

The interest rate charged to consumers has not fallen in the same way as the Fed's short-term rate.

This is partly because bond markets have long-term concerns about inflation, and solutions which would reduce the US dependence on oil are a long way off.

The Bush Administration and Congress are still quite far apart on plans to fix the regulatory system which allowed lax lending to sub-prime mortgage borrowers.

Who's to blame?

As the November election draws nearer, Democrats are increasingly seeking to blame mistakes by the Republican administration - and the Federal Reserve - for opening the way to the present difficulties.

Mitt Romney
Republicans talk about Mr Reagan, not Mr Bush these days

The president argues that the current short-term difficulties of the economy are overshadowing the long-term achievements under his stewardship - and that preserving his tax cuts is the key to future economic growth.

But with the public seemingly already sceptical, Republican candidates are increasingly referring to the achievements of Ronald Reagan, rather than the problems of the Bush administration, when talking about domestic issues.

It appears that for a Republican to be successful in the November presidential election, he will have to find a way to distance himself from the Bush Administration not just on Iraq, but also on the economy.

US GDP growth by quarters

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